COST · Discriminatory and Nondiscriminatory Trade Costs

Discriminatory and Nondiscriminatory Trade Costs

A common way of assessing the costs and benefits of RTAs is by using the Computable General Equilibrium (CGE) approach. CGE based studies then use this framework to forecast for example, the trade growth, job creation, and welfare gains from forming RTAs. Unfortunately, their predictions poorly match the actual medium to long run outcomes of existing RTAs. The accuracy of CGE models is of paramount importance not only for policymakers but also for society. One way in which modern CGE models fall short is in their overly simplistic approach to trade costs. This includes both their measurement and their place in the underlying model. In particular, CGE studies to date fail to account for within-country trade costs, i.e. trade costs which are non-discriminatory as they apply to both domestic and foreign firms. Instead, they focus solely on discriminatory trade costs which apply only to foreigners. This has critical implications both in how to measure trade costs (as many compare within-country to cross-border trade and therefore combine discriminatory and non-discriminatory trade costs) and in how to include them in the analysis. As the goal of RTAs is to reduce trade barriers, this oversight can result in incorrect expectations on an RTA's impact and therefore wrong policy recommendations. The overall objectives of the project: 1. Construct trade cost measures. Using a new theory consistent measurement method to obtain bilateral discriminatory and non-discriminatory trade cost measures at product level for over majority countries of the world. In particular, by separating international and domestic trade costs into discriminatory and non-discriminatory trade cost components, this will push the frontier of trade modelling. 2. Undertake Cost and Benefit analysis of a RTA. Developing specifications for modelling possible impacts of trade costs, and using constructed trade cost measures, to perform a CGE based quantitative assessment of costs and benefits of a RTA, and compare with outcomes of other CGE studies. This is to highlight the improvements of the new methodology and refine the existing policy recommendations.

Data: CORDIS, © European Union